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The Financial Services Authority has found that the UK mainstream and hedge fund management industry is generally failing to put its clients’ interests ahead of its own, despite managers’ repeated claims that “clients come first”.

Ed Harley, head of the asset management department of the FSA, said the regulator had found many examples of asset managers falling below the expected standard. He said: “We want asset managers to put customers at the front and centre of what they do, and it can be done – we’ve seen examples of it – but we feel that some firms have been paying lip service. We are disappointed.

“Many asset managers think they are acting in their clients’ best interests, but when we looked into the detail it turned out they were taking a very narrow view of what that meant. Putting customers first is not just about trying to pick the right stocks, it’s about the full service you provide.”

The FSA has just published a report of a nine-month thematic review it finished this year. The report said: “In most cases, senior management failed to show us they understood and communicated… a credible, long-term commitment to serve their customers’ best interests… or even that they had reviewed or updated their arrangements for conflicts management since 2007.”

Harley said that, of the 15 mainstream and hedge fund managers he and his team had sampled, “only two or three had good arrangements across the board. The rest we thought were poor”.

The regulator said the seriousness of the issues meant it had to take action to ensure firms comply with the various FSA rules relating to conflicts of interest.

The FSA is asking the board of every asset management firm – more than 1,500 companies, it said – to discuss the FSA’s findings. The chief executive of each firm will have to confirm that their company has adequate arrangements in place.

The FSA warned that it was considering enforcement action against some firms.

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The report expressed concern over several areas of detail, in particular the fact that many firms pass on the cost of any errors to their clients; the allocation of investment ideas and trades between clients; and the use of customer’s money to buy research.

The report said: “We noted that some firms – mostly hedge fund managers – relied on clauses in their contracts with customers to remove the liability for the costs of errors and omissions other than in the case of gross negligence. We found that some firms used these clauses to justify not reporting errors to customers.”

It found examples where managers’ marketing documents were misleading: “Most firms emphasised the role of team-based research and sharing ideas in their marketing material. But we identified that [of these] some firms employed investment processes that were not based on a team approach and where individual portfolio managers were given significant leeway in investing their portfolios, with no requirement to share information and ideas.”

On the purchase of research, the report said: “Firms regularly spend millions of pounds of their customers’ money buying research and execution services from brokers. Only a few firms we visited exercised the same standards of control over these payments that they exercised over payments made from the firms’ own resources.”

In addition, the report said the FSA had found variable standards among firms for controls over employees dealing for their personal accounts, known as PA trading.

It found examples of entertainment taken by firms’ staff that, it said, “if fully disclosed to the firms’ customers, might have caused concern about the objectivity of decisions taken on their behalf”.

The FSA said its review had been prompted by finding evidence in other supervisory work that some firms no longer see conflicts of interest as a key source of potential detriment to their customers, and had relaxed controls that the FSA had considered to be well-established market norms. It conducted its review of asset management firms, and their arrangements for managing conflicts of interest, between June 2011 and February 2012.